Marginal Cost Should Not Be Factor in IP PolicySingleton Advises Policymakers to Consider Long Term Efficiency in IP Markets

WASHINGTON D.C. - The marginal cost of a good is not usually a relevant factor when crafting intellectual property policy, explains Solveig Singleton in "Jargonomics: Intellectual Property and Marginal Cost," released today by The Progress & Freedom Foundation. Drawing on definitive work by economists such as Baumol, Coase, and others, Singleton explains that marginal costs estimates are based on models of static efficiency, not dynamic efficiency, which is more relevant to policymakers.

In the paper, Singleton, PFF Senior Adjunct Fellow, addresses the claim often made by intellectual property policy critics that goods should be priced at marginal cost. The author explains that profit margins on goods must be high enough to both support investment and exceed the opportunity cost of alternatives. Singleton also dismisses claims that marginal cost should be used as a guide to pricing goods with high initial production cost and low or declining marginal cost, as is typical for intellectual property products. The author claims that these sectors should not be treated any differently in the policy world because all industries strive for low marginal cost and only vary in the matter of degree.

Prices set above marginal cost are not a sign of undue market power or monopoly due to intellectual property or anything else.

Prices above marginal costs bring new investment and new competitors into the market in question.

Setting prices at marginal cost (for example, in the context of compulsory licensing of music or pharmaceuticals) does not amount to setting the "right" price; only a market can do that.

Insisting on static inefficiency in the short run reduces investment and undermines dynamic efficiency in the long run.

Singleton concludes, "Someone who compares the world of perfect competition to the real world is likely to see market failures propagating left and right. In the real world, though, supposed 'market failures' have a powerful tendency to cure themselves. This is true in intellectual property markets as elsewhere."